Besides lower margin requirements, a principal difference between purchasing Single Stock Futures and shares of stock concerns interest rates and dividends. If you buy a stock (on margin), you receive the dividend (if any), but have to pay or forego interest. By going long an SSF, you dont receive the dividend, but you have the interest savings or payment. If interest rates are greater than dividend rates, the SSF will be trading at a premium to the stock price. If dividend rates exceed interest rates, then SSFs will be trading at a discount to the underlying stock price.

Single Stock Futures can be easily substituted for stock when using equity options, such as with a buy-write (covered equity call strategy). Investors could be better served using SSFs in place of the stock. For example, an investor who buys stock and sells calls against the long stock position (buy-write) is exposed to both interest rate and dividend risk. Higher (lower) interest rates and lower (higher) dividends increase (decrease) carrying cost on the long stock and cause the price of the short option to rise (fall). SSF prices increase (decrease) with higher (lower) interest rates and lower (higher) dividends, and will therefore offset the negative (and positive) effect of a change in interest rate or dividends. Since SSFs are priced like option combos (long a call and short a put with the same strike price, or vice versa), interest rate and dividend risk can be mitigated using SSFs in place of stock in combined stock/option strategies.

Since SSF prices are affected by changes in interest rates or dividends, spread strategies can be implemented to incorporate an opinion on interest rates or dividends while maintaining a non-directional viewpoint on the price of the underlying stock. Someone who is uncertain regarding market direction, but feels that interest rates are likely to rise, could buy a longer-dated SSF and sell a shorter-dated one, both on the same underlying stock. The spread will profit from an increase in interest rates, but will virtually eliminate any exposure to underlying stock price movement. The opposite spread, selling a longer-dated and buying a shorter-dated, would be appropriate for an expectation of lower interest rates. Similar spreads can be used based on changes in dividends. Expecting an increase in dividends, you would sell longer-dated and buy short-dated. Conversely, expecting a decrease or elimination of dividends, you would buy long-dated and sell shorter-dated. Since SSF prices change as interest rates and dividends vary, SSFs can provide valuable information regarding the markets viewpoint on future interest rates or dividend policy.

Many investors are familiar with the term program trading. It is used when the prices of index futures contracts deviate from fair value. If the price of the future exceeds the fair value price by too much, arbitrageurs will buy the underlying stocks that comprise the index and sell the comparatively over-valued futures. If the futures price is too low, the reverse occurs, selling stocks and buying comparatively cheap futures. In the first instance, buying stocks/selling comparatively over-valued futures is a buy program. The second case, selling stocks/buying comparatively undervalued futures is a sell program.

While this arbitrage strategy has been used mostly by institutions trading index futures, the advent of SSFs will allow individual investors to implement a similar strategy. When contemplating an SSF trade, a trader should observe whether the future is trading under, over, or at fair value. If trading under fair value, the trader could consider buying the future instead of the stock, since it is a comparatively better value. If the future then becomes over-valued, the trader can sell his future and buy the stock, realizing a benefit of the move from under to over valued. Also, when desiring to liquidate (sell) a long stock position, an investor may elect to sell an over-valued future in place of the stock to realize the comparative overvaluation.

Note: Security futures products are not suitable for all investors. Futures trading involves substantial risk of financial loss and should be considered carefully before making any trades.